Ladies and gentlemen, thank you for standing by. Welcome to the 3M Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Matt Ginter, Vice President of Investor Relations at 3M.

Matt Ginter

Good morning, everyone, and welcome to our third quarter earnings call. Before we begin, just a quick reminder. On the morning of Tuesday, December 7, we'll host our annual outlook meeting at the Grand Hyatt Hotel in New York City. Those of you that are on our e-mail distribution list should've received an invitation earlier this week. Please RSVP as soon as you can and for those of you who are not on our list who would wish to go, just drop a note or call and we'll take care of you. Take a moment if you would to read the forward-looking statement on Slide 2. During today's conference call, we'll make certain predictive statements that reflect our current views about our future performance and financial results. We base these statements on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent Form 10-K lists some of the most important risk factors that could cause the actual results to differ from our predictions. So let's begin today's review. I'll turn the program over to George Buckley. Please turn to Slide 3.

George Buckley

Thank you very much, Matt. And good morning, everybody and thank you very much for joining us on our third quarter call. It was another very strong quarter for 3M as we continue to drive our growth plan and overall, Q3 sales and earnings were in line with our expectations. And if you can imagine, I'm especially pleased with the 11% increase in organic volume because of the backdrop of continued economic uncertainty and tougher comps. Organic volumes are now up 16% through September and we continue to set sales and profit records. Q3 sales brought in a new record for 3M, with the strongest growth coming in E&C -- Electro and Communications business, where sales were up 25%; Display and Graphic, where sales were up 19% and Industrial and Transportation, where they were up 14% and Consumer & Office, which was up an impressive 11%. And they, for example, exceeded $1 billion in sales for the first time ever in a quarter. Health Care and Safety and Security is still robust, but both had some peculiarities to deal with in the quarter, which I'll explain in a minute.

We continue to grow across all geographies, once again reinforcing our international growth strategy. Sales in emerging markets as a whole were up 25% in the quarter and now exceeds 34% of total company sales. Asia Pacific grew 28%, Latin America grew 14% and Canada, 13%. Korea was up 48%, India 39%, Russia 32% and the China region was up 31%, with Brazil up 25% as well. Operating margins remain strong at 23%, with all businesses staying at operating margins of 20% or higher. EPS was $1.53, up 13%, another all-time Q3 record for 3M. Free cash flow was $1.1 billion, with nearly 100% conversion rate.

We also continued our accelerated investments in the future. We consider that this is extraordinary important in solving the puzzle of higher growth rates longer term. So, for example, we increased R&D investment by 6% year on year and we supported our brands with increased advertising and merchandising expense of more than 30%. The business venture investments, which are those investments outside R&D, continue to track at about $100 million additional annual spend year-over-year. We put more capital work by closing the acquisitions of Arizant and Attenti Holdings and we acquired a majority stake in Cogent Inc. and in early October, we also announced the acquisition of Alpha Beta, which is expected to close in the first quarter of next year. I'll address those acquisitions in more detail in a few moments.

Overall, the strength of 3M's portfolio was again evident in the third quarter. Industrial and Transportation, which is the giant of 3M's businesses, where sales rose a huge 14% with broad-based double-digit local currency growth in every single unit led by Renewables Energy division, which was up 83% in sales and limited solely by manufacturing capacity, which we're adding as fast as we can. The growth is everywhere in industrial. As examples, Energy and Advanced Materials rose to 25%, Abrasives was up 18%, Automotive OEM was up 17% and Industrial Adhesives and Tapes, which is our largest business, was up 13%. As evidenced in our success in Automotive, Q3 will ride Automotive growth of up 10% while 3M's organic volumes are up 18%. Year-to-date, worldwide automotive builds are up 29%, while 3M's organic volumes are up 40%. Operating income for the sector rose by 14% to $446 million, with operating margins at 20.2%.

A remarkable reinvention of this heartland of 3M's business by AC Shen [ph] and his team is nothing short of stunning.

Health Care. Sales rose there by 1.5% in local currency, which is much slower than we've seen in recent quarters. The most evident impact in the quarter was the reduced H1N1 related demand, which lowered year-on-year growth rates by full two percentage points. You recall that H1N1 demand was the highest in the third quarter of last year. Low-core demand seems to be related to the uncertainty surrounding of Obama care. You've seen that pattern reflected in pretty much every company reporting so far in the Health Care space. Hospital admissions and treatments are down at many U.S. hospitals so distributors are wary and evidently running down inventories.

As an illustration, I recently read that 50% of Cincinnati hospitals have reported lower admissions. Higher unemployment and weaker financial seem to be closing people to pull off elective procedures and even normal health care as well. We have no reason to believe that this is anything other than temporary effect and that it will pass. But clearly, there is caution everywhere as we we've seen similar slowing in Western Europe. That's a news with our Skin and Wound Care business was up 7%, Food Safety, absent of divestiture we did last year was up 12%; and Dental was up 4%. Operating income in Health Care was $326 million, with margins just short of 30%. At our December outlook meeting, we'll give you some additional views on how Health Care reform might affect our business. But the short form is that the impact is likely to be felt more in expensive treatments and advanced devices where we think rationing through tough pricing mechanisms is going to be the highest. Of course, the impact is just U.S.-based. While it's clear everyone is going to be affected, we feel that our business, which is mostly consumables and broadly based internationally, is less likely to be problematic. Health Care remains a very strong franchise for 3M.

Moving on, local currency sales in Display and Graphics were up 18.4%, another excellent quarter. Optical system sales were up 28%, driven by new products for LED flatscreen televisions. In September, we saw the beginning of the much talked about and highly-anticipated inventory adjustment in the LCD TV industry, and we expect it to continue into the fourth quarter. This is clearly just the market adjustment as our film attachment rates remain as strong as ever. The inventory correction cost is about $15 million of earnings in the third quarter. Overall, I'm very pleased with the way our Optical business has matured and progressed. It wasn't that long ago that a hiccup in this business would cause us enormous heartburn. Yes, today, we still feel it and it's always going to be a tough industry but genetically, turns on a dime so to speak, just as it did in September. We have a much better understanding of the market dynamics and how to manage them and we have absolutely superb management team in place to do it. We're building that what we've done in 3M's traditional non-optical core. Over the last five years also means that our optical business no longer has to hold the sales and earnings growth wagon more or less alone. We're so much more diverse in growth now than we once were. When Optical catches a cold, yes, it still means 3M taking a bit of nasty medicine but the company no longer gets about a figurative bubonic plague.

Continuing with display, commercial graphics continued the strong recovery, with impressive double-digit sales growth. Growth is coming from innovative new products right across and up and down the market spectrum. We also had positive growth in traffic safety systems, quite an accomplishment really, considering there's still no high refunding build in the United States. Total Display and Graphics operating income rose 37% to $282 million with margins of 26.4%.

Consumer and Office had a great Quarter 2, significantly outpacing growth at the retail level and they topped $1 billion in sales for the first time ever. Joe Holland and his team drove 11.1% local currency sales growth with a full nine points of organic growth. Yes, nine points and another two points from acquisitions. Office products and the DIY business both achieved double-digit local currency sales growth and Health Care and stationery products reached high, single-digit growth too. As was the case last quarter, we increased advertising and merchandising investment by over 30% year on year and that pushes advancing many of our key brands. Operating income for consumer office was $235 million, with margins of 23%.

Safety, Security and Protection Services sales were down 1.6% in local currency. Operating profit for SS&PS was $164 million, with margins of 20.2%. This is truly a wonderful sector, as in Health Care, H1N1-related demand did not repeat in the third quarter of 2010, in this case impacting year-on-year growth for SS&PS by a whopping 10%.

The grocery products were also at margins strongly accretive to both the Security segment margins and to 3M as a whole. Consequently, operating margins declined 700 basis points year on year, which is entirely explained by H1N1 and secondarily, by the impact of image protections in the Roofing Granules business, both of which we consider to be temporary effects. Going forward, Safety and Security margins in the fourth quarter will still be negatively affected by these same factors, as well as by purchase accounting for Cogent and Attenti. These lapping impacts are purely an arithmetic issue with nothing fundamental to be concerned about. Margins will normalize around 23% as the H1N1 comps finish passing through the system sometime in the first half of next year.

In the core of this business, we saw a double-digit sales increases in Security Systems, Corrosion Protection, Building and Commercial Services and also in Occupational Health and Environmental safety, if we exclude the H1N1 effects I mentioned earlier.

Electro and Communications. Sales in local currency were up 24%, with currency translation adding another point and a half on top. I think it's important to note the continued strength in our business servicing the consumer electronics industry. For example, local currency sales were up 59% in electronic markets materials and 30% in Electronic Solutions division. In addition, we saw a double-digit local currency sales growth in electrical markets, which mainly serves utilities and electrical distribution. Local currency sales were up slightly in the Telecom Infrastructure business also. Electro and Communications drove operating income of $173 million, which is up 49% as operating margins expanded 3.6 percentage points, up to 22.4%. So all in all, even with some transient H1N1 and raw material cost impacts, this is another very strong performance across the board for 3M. I'd like to peek now for a moment about acquisitions.

We significantly strengthened our Safety and Security business by adding Attenti and Cogent to their portfolio. Cogent brings to 3M a technology platform that we didn't have previously with its finger, palm and iris based biometric technologies, and Attenti positions us well in the segment of law enforcement that we didn't have access to until now, as well as opening opportunities for us in the eldercare and other industries. Both of these businesses are operating markets growing at greater than 20% annually. We see Attenti as a completely new, high-growth platform. We've long believed that high value asset tracking is a great future business. The logical application extensions to military, first responder, eldercare, mobile hospital assets, mining safety, animals and even in children, if you decide it, are massive. In Health Care, the acquisition of Arizant bolsters our infection prevention business by solidifying our position in the growing area of patient safety, with its line of patient and body fluid warming systems. This market is growing at double-digit rates and is likely to accelerate since the focus on body core warming is specifically laid out in the new Health Care legislation and is seen as a fundamental method to the reduction of cost control of hospital flame infections. Today, this is predominantly a U.S. business and we intend to leverage 3M's world-class international footprint to expand it overseas.

Alpha Beta, in our Industrial segment, perfectly exemplifies our pyramid strategy in action by adding B and C-care products to our own line of tape offerings. Alpha Beta is a world-class ultra low-cost tape manufacturer located in the China region. Over the coming years, we expect growth rate to be very high and we'll in-source a lot of currently outsourced tape manufacturing to Alpha Beta. This is positioned right where the fastest growth is, both geographically and segment wise. And importantly, it establishes a low-cost tape manufacturing beachhead in Asia, something we didn't have before. So this is a great business, accretive addition to one of our most powerful core businesses. It's not an overstatement to say that 3M is the greatest Adhesives tape manufacturer in the world so investing here is perfectly logical for us.

On R&D, you will note that for 3M, investment in innovation is investment in our future. In the third quarter, R&D investments were north of 5% of sales and we expect to maintain this level going forward. As a result of these investments, our New Product Vitality Index is now in the 32% range as we continue to drive innovation right across 3M. More than a year ago, we forecasted economic growth will slow in the second half of 2010 in some of our markets. Some folks disagreed with us, thinking that perhaps moving too conservative, but I think things had played out largely the way that we anticipated and so the trend is no longer a surprise. Part of this is purely arithmetic year-over-year comparisons, but part is also clearly economic.

Looking ahead, the good news is that we've seen no signs of any broadscale, broad-based double dip. If it does come, we believe it would be limited in geography, short in duration and relatively mild. Our overall growth remains good in those geographies where we expect it to be good and it's hard where we expect it to be hard. No, we have not seen China slowing and ironically, if the R&D does begin to appreciate, it will provide you mostly net positive benefits. After all, we're highly profitable there and a net importer to China. Excluding Japan, which itself had a 10.5% local currency growth in the quarter, similar positive observations could be made for Asia broadly and for Latin America, the Middle East and Central and Eastern Europe. The practical reality is that those companies with broad footprints in emerging markets will prosper as long as they remain able to compete with small and fast growing local competitors. And for that, you absolutely must be cost competitive.

For the near-term implications for the United States and Western Europe, Germany in part, are inspiring. We expect an extended period of slow recovery in these markets. The best news is that the recovery in automotive and a positive look in housing will look like enormous percentage changes. More broadly, U.S. factory utilization remains low, which implies a long recovery period in commercial construction. Industry transients in the industrial distribution channel have died down so they're no longer healthy. Unemployment remains, I think, as we all know, the key to the puzzle, particularly in the United States. Nothing in the end markets suggest big changes in anything, plus or minus, except the numbers will look arithmetically slower. Invention and penetration remain the keys to grow fast in these slow markets and that's why the R&D and business development investments that we spoke about earlier are essential.

Breakthroughs in power distribution, smart grid, solar, environmental and innovation more generally, still provide big opportunities. Differentiation still works and 3M has that in its space. So gradual geographic realignment of our sales force may be needed to fully take advantage of opportunities in faster growing states and market spaces. With that, I'll now turn the call over to Pat for a review of the third quarter P&L.

Patrick Campbell

Thanks, George, and good morning, everyone. Please turn to Slide #6. Sales rose 11% in the third quarter, which was the fourth consecutive quarter of double-digit sales improvement. Organic volume rose 10.8% in the quarter, net growth was 1.4x worldwide industrial production as the business continues to expand in size in terms of sales, operating income and economic profit. We drove 23% organic volumes in Asia Pacific, with both consumer electronics and the base business increasing over 20%. So our strategy around both export-oriented business and meeting local demand is working very well. Organic volumes grew 13% in Latin America, 6% in the U.S. and 4% in Europe, so no geography was left behind.

Acquisitions added 50 basis points to growth from the quarter and selling prices declined just 20 basis points year on year. Third quarter gross profit dollars grew 9% year on year and notably, were more than 5% above Q3 2008 levels. For our strategy to grow the business is resulting in higher gross profits. Gross margin percent declined 90 basis points, with higher raw materials accounting for about one half of the change. Material inflation was approximately 2.5% year on year. Sales mix also negatively impacted gross margins in the quarter. As an example, H1N1-related respirator demand was strong in Q3 of last year and factory utilization levels in the businesses were very high. Those same factories ran at more normal levels this year. A lower sales contribution from Health Care, coupled with these attractive gross margins, also impacted the mix negatively. Helping to mitigate these factors were savings due to yield improvements, waste reduction, faster line speeds and ongoing productivity, driven by our Six Sigma teams around the world.

In the SG&A area, sales and marketing investments rose 18% in the quarter while administrative and other costs were up just slightly. So in total, SG&A was up 13%. We anticipated this in our planning as we mobilize throughout the year to increase both sales coverage and marketing strength, particularly in fast-growing emerging economies. In addition, we increased investment in advertising and merchandising by over 30% year on year to drive higher sales volume with our customers, both now and into the future. We invested $354 million in research and development in the quarter, up nearly $20 million over last year's third quarter. Operating income was $1.6 billion, the highest of any third quarter on our history and margins are now standing 22.9%. All six reporting segments posted 20% plus margins, the third consecutive quarter that we have accomplished this feat. Our corporate miscellaneous reporting segment showed a small loss this quarter versus the first six months run rate. This was largely due to lower corporate spending, various compensation-related adjustments and a few other miscellaneous items.

By its nature, profit loss in this segment can swing a bit from quarter to quarter. On a September year-to-date basis, the operating loss in corporate miscellaneous is larger than 2009 by $117 million, with the difference largely attributable to higher pension expense. The third quarter tax rate was 26.8%, down about five points year on year due to more effective international rates and reflects some of the great progress we have made in reducing our tax rate. We expect that the full year reported tax rate will be approximately 28.5%. Earnings were $1.53 per share on a GAAP reported basis, an increase of 13%. This also was a third quarter record for the company.

Now let's look at the year-to-date results, so please turn to Slide #7. We are very pleased with how the business has performed thus far in 2010 and are running ahead of our expectations going into the year. September year-to-date sales were up 17%, nearly all driven by organic volume improvements. Asia and Latin America have been the stars in terms of geographic performance. On a business-by-business basis, growth has been the strongest in the Electro and Communications at 31%, Display and Graphics at 29%, and Industrial and Transportation at 22%. These three businesses have done an outstanding job at launching new products and taking share in a number of important and growing industries, including Consumer Electronics, Automotive OEM, General and Industrial, and Renewable Energy.

Year to date, SG&A spending is up 11%, investments in sales and marketing are up 14%, a combination of more sales related fee demonstrate in growing markets, further investments to strengthen our marketing capability and as you see on this chart, a near 30% increase in advertising and promotion to drive current and long-term growth. Tight control over G&A remains a top priority for the company as it help speed additional investment in sales and marketing and R&D. On a year-to-date basis, G&A is up only 5% compared to sales growth of 17%, so we continue to drive leverage in this area.

Operating income is up 33% year-to-date and operating margins are over 23%. All businesses are in 20% plus margins to the first nine months of the year. The reported tax rate through nine months was 28.3%, down from 31.2% in 2009. Recall that our tax rate was 34% five years ago, so we're making us some progress in this area.

We expect the rates to tick up a bit in 2011, which I'll talk more about in a moment, but we remain committed to further long-term reductions in our rate. Evolving the manufacturing base to lower tax jurisdictions will be critical to making this happen. Finally, year-to-date net income and earnings per share rose 40% and 36%, respectively. Return On Invested Capital was a strong 22%.

Please turn to Slide 8 for a balance sheet and cash flow discussion. Free cash flow is $1.1 billion in the third quarter and we converted nearly 100% of net income to cash. This was $466 million less than the third quarter of 2009, driven largely by three factors: One was pension contributions, as we contributed $241 million more than we did last year. In addition, the year on year difference in cash taxes paid was $111 million. Finally, working capital changes reduced free cash flow by $175 million to meet the volume demands. On a year-to-date basis, we generated nearly $3 billion of free cash flow and converted 94% of net income to cash.

Networking capital turns remained steady year-over-year at 5.1 turns. We had some improvement on the receivables side, offset by somewhat higher inventories, aligned of course again to the higher growth rates. Acquisition activity has been light in the first three quarters of the year. As we have recently announced and George has mentioned earlier, we'll close a number of deals during the fourth quarter, plainly use some of our excess cash. Through nine months of 2010, we returned more than $1.5 billion to shareholders via a combination of dividends and share repurchases, a 43% increase versus 2009. With three quarters of the year behind us, let me address our outlook for the year.

Please turn to Slide #9. We now expect our organic volume growth will come in between 13.5% and 14% for the year versus the prior forecast of 13% to 15%. We also expect that earnings per share will fall somewhere within the bend of $570 million to $574 million. This range includes estimated acquisition related dilution of approximately $0.06 per share related to the recently closed deals which are of course not factored into our July guidance. On a GAAP reported basis, we expect earnings to finish for the year between $5.59 and $5.63 per share. We anticipate that operating margins will be approximately 22.5% for the year, which also as I previously mentioned acquisitions. The full-year tax rate is expected to be at or just below 28.5% on a reported basis and average diluted shares outstanding should be in the bend of $725 million to $727 million for 2010 in total.

Please turn to Slide #10. As Matt mentioned, we'll be hosting an investor meeting in the morning of December 7, in New York. We'll address our detailed 2011 outlook at that meeting, but I thought I give you a preview this morning. But please wait for the December meeting for some more specifics. At the moment, we are targeting 2011 sales growth of 11%, assuming a couple of points of acquisitions in current FX rates. We are driving the business to deliver 35% incremental margins on an organic growth. Outside of those incrementals, currency should be an additional income tailwind for us, again reflecting current exchange rates. We estimate that pension expense will be a $0.30 headwind next year. This assumes that the 4.86% discount rate at the end of the third quarter falls until year end, which, in our opinion, is an unsustainably low level. But regardless, it is down nearly a point from 5.77% that we used at last year end. The 2011 expense estimate also assumes U.S. asset returns of 11%, which was our actual performance through the first nine months of the year

Finally, the $0.30 headwind assumes that we make an additional $700 million contribution to our pension plan, assuming current discount rates and asset return performance will always hold. But candidly, the actual contribution may differ. If rates or returns move our way, which have happened thus far in October, we would likely contribute much less than this. We don't have any mandatory funding obligations. What is most important for us is to be adequately funded at year end and to keep the earnings headwind at a manageable range. The anticipated expense increase is due to two factors: One is the amortization of prior period investment returns, namely the 13.6% loss experienced in 2008, and I'll remind you though, this was far better than the 30% market decline for that year. The second factor is the absolute level of interest rates. More rates, of course, increase the present value of liabilities, which in turn increase future pension expense. We also anticipate an $0.08 per share headwind due to our compensation policy change. As a reminder, prior to 2009, we allowed employees to bank a certain amount of unused vacation. Effective January 1, 2009, we moved to a user to loser approach and employees were given two years since the last time we have previously banked vacation. This change resulted in an $0.08 per share benefit in our 2010 results, which does not repeat itself in 2011. This item is non-cash, income statement only. Helping to offset this will be additional productivity gains due to the fact that employees will have less time off in 2011, which will help rein in additional hiring. Finally, at this early stage, we're expecting a 2011 tax rate of 30% or slightly below versus an estimated reported tax rate of 28.5% for 2010. We have some more work to do before reviewing our final 2011 plan with you in December but this should give you a sense of where we are headed.

In summary, I would conclude that our year-to-date results are very much in line with our longer-term strategy. We're driving faster growth, reinvesting to secure the future of the business and maintaining best-in-class margins and return on capital. Our balance sheet remains in great shape, so regardless of the shape of the economic recovery, we'll have a significant funding advantage. That concludes the formal portion of today's conference call. So let's begin the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Robert Cornell of Barclays.

Robert Cornell - Barclays Capital

Despite having a good quarter, but I think you mentioned an inflection point, September, maybe you could just go over that a little bit more and you talked the impact of the fourth quarter maybe just give us some visibility there, please?

George Buckley

Well, obviously, Bob you see every two years, you see these kind of corrections that take place in inventory. The great news for us is we haven't lost any attachment as far as we can tell, which is unlike what happened to us before. So this is probably just started. I think it'll go through the system, the potential impact in the fourth quarter you see across in the end, you don't know where this market changes so rapidly but the net impact we think might be as much as $70 million in our fourth quarter earnings. But...

Robert Cornell - Barclays Capital

That's on profit, George?

George Buckley

That's on profit, yes. So that's the sort of numeric number there, Bob. But I think what has really happened so well here is we've got very close to these customers, they like our innovation, it captures in the product and that is for us the most important thing and we'll live through these things. And as I said, we've had these things come and go before. This time, of course, you say it puts some pressure on earnings but it's not the kind of outs that it once would've been.

Robert Cornell - Barclays Capital

So you mentioned the Alpha Beta acquisition and you talked about putting some product back in-house that have been outsourced and the whole push into the better adjacency, I mean, what sort of profitability level would Alpha Beta see relative to the 3M average when you have that strategy completed?

George Buckley

Well, at their current operating margins, Bob, they would be dilutive to 3M but when you bring them altogether, I mean, first of all we don't need to invest a lot of G&A in that area since it not always branded product and we think it's just this huge growth and leverage opportunities in that space, Bob. I mean, we were selling into that space and paying high prices than we'll get from Alpha Beta. So actually, I think it will be helpful for us in the long run. And obviously, this is not competitive positioning at the bottom of the marketplace, which has always been the place where we've got attacked by growing sort of low-cost competition. So this is strategically very important for us, not only to provide growth but to provide the kind of bulwark to our higher-margin, higher-performing tapes, higher fee at the market premium. So it's very important, I think, Bob.

Patrick Campbell

Bob, I'll just going to add just to kind of build on George comment. You have either the divisional level, which is our largest division is Adhesives and Tapes. As George mentioned, our objective there is we'll pull this in into some of the cost savings we have through in sourcing and the like that the margins in that business should hold where there truly out at the divisional level.

Robert Cornell - Barclays Capital

So the margins at the division level would be the same when you consolidate Alpha Beta and push forward?

Patrick Campbell

Yes, absolutely.

Operator

Our next question comes from the line of Scott Davis of Morgan Stanley.

Scott Davis - Morgan Stanley

Guys, it wasn't 100% clear to me why you didn't have a little bit more of a margin pullthrough in Industrial and Transportation. I understand there's some raw material headwinds and such, but given that type of growth rate in that type of business, maybe we would've expected a little bit more incremental margin. Can you give us a little bit more detail on that?

Patrick Campbell

Yes. First of all, Scott, a 20% of margin in Industrial business is a damn good margin. We're obviously investing in that business. We're investing in new technology, putting the new investment in a lot of the emerging markets and so forth. Reality is the margin in that business will be probably the 21%, 22% range over time. It's a little bit lower this quarter, but nothing to be alarmed with. It's something that we've been kind of expecting through the time based on the investments that we're making. So no alarm from our side at all as to where the margins in that business are.

Scott Davis - Morgan Stanley

So the answer is basically investments that you -- now, would we think of that as investment, some things that you put forward just given how strong every year you had discretionary spend and such that were pulled forward in the quarter?

Patrick Campbell

Yes. It'd be fair to say and I think if we go back a couple of calls that in my comments really for the year to date is that we are running ahead of where we thought we would be for the year. So we had a number of investments lined up that, if conditions awarded effectively, we would pull into 2010 here. So that's kind of just one example of an area that has occurred.

Operator

Our next question comes from the line of Jeff Sprague of Vertical Research Partners.

Jeffrey Sprague - Citigroup

Can we -- I guess, I'll make my question and my follow-up around the deals. First, when you look at largely what you've acquired here, George, I would say they have kind of the feel of being a bit more equipment-related companies with the exception of Alpha Beta, rather than being kind of materials, plans-related company, which is kind of the core strength and bailiwick of 3M. So just as a matter of kind of philosophically when you look at adjacencies for your businesses, how you manage that the challenge that some of these are software companies in a sense and just the kind of the DNA for the organization to kind of do these types of deals going forward.

George Buckley

We've long recognized that one of the big growth areas for the future is going to be kind of software and electronics. In fact, if you look at our strapline, Jeff, over the last few years, you see this kind of creeping in bit by bit. In fact, maybe not creeping anymore, it's galloping. And so we recognize that this is going to be more the future, a bigger piece of our portfolio in the future. If you look at some of these high-growth spaces, ultimately, they're about sort of tracking and decision-making, ultimately is connected to electronics and software. So I think you're right in that area. These are very high growth areas, and we have some sort of related businesses already, Jeff. You might remember we've got library equipment business that tracks library books. This is kind of in a way a lateral extension of that kind of -- instead of tracking a book, you're tracking a person or tracking an eldercare person. So the not that different as you might think if you think of it in that context. But I think ultimately, Jeff, while we will always have this heartland of material signs, I think we will see some movements into these kind of equipment-related businesses. But you're not going to see us getting into sort of a big, giant machines like some of our contemporaries have. This is going to be kind of small, carry with you type stuff on a much smaller scale in those sort of things, but well spotted.

Jeffrey Sprague - Citigroup

And then I was just wondering as the follow-up, if you can help us on the 11% you suggested for next year is kind of a base line given all these deals are kind of closing at different times. What kind of annualized deals impact is included in that 11%?

Patrick Campbell

Yes. I guess all I'm saying right now, because we still have some more work to do between now and December is we have a couple of points of acquisition-related growth in that 11% number for next year. A piece of that is the deals investment now so there's a small provision for stuff that obviously is currently in the system.

Operator

Our next question comes from the line of Steven Winoker of Sanford and Bernstein.

Steven Winoker - Bernstein Research

Pat, I know you're going to give all the detail in December on 2011, but on the guidance that you did provide here, should we be adding that to adjusted or GAAP number as we're trying to understand -- think ahead to where would that $0.55 or $0.60 it looks like it's implied on top of.

Patrick Campbell

Steve, I'd come off of our GAAP numbers when we present our plan, we'll come off of our GAAP numbers.

Steven Winoker - Bernstein Research

And then without getting more into detail there, for the quarter, pricing was a 20 basis point headwind, I think and at one point, 440 basis points of that was in Asia Pacific. Am I correct in assuming that was mostly in Optical and Display and Graphics or were you seeing anymore pricing headwinds in any of your other businesses?

Patrick Campbell

It really remains in the Consumer Electronics space, primarily optimal.

Matt Ginter

Steve, this is Matt. Just as a reminder, generally speaking, electronics in total for the company is about a one point impact on price in any given year. So really, ex electronics pricing would've been up a little bit for the company.

Steven Winoker - Bernstein Research

And then the raw material, 2.5%, was that concentrated in any particular segment?

Patrick Campbell

Well, first of all, it's more of the U.S. than it is international at this point in time. It's probably more in our industrial-related business at this point in time. But just cutting across most of the businesses but industrial probably has the large piece of it.

Operator

Our next question comes from the line of Stephen Tusa of JP Morgan.

C. Stephen Tusa - JP Morgan Chase & Co

Just to be clear on, I guess, the fourth quarter numbers, I think that the performance, the organic performance this quarter was good, it was about in line with kind of the comp would've suggested. But your comp gets a lot tougher in the fourth quarter and you're still really calling for here maybe just a couple of point degradation in the growth rate. Can you talk about which end markets are getting marketing better from a kind of comp perspective? That's going to help you out and I guess just where these new products are layering in the fourth quarter, so where we would expect kind of the best organic performance here in the fourth quarter and then one quick follow up on 2011.

George Buckley

Well, I think -- obviously, we've talked about some kind of correction in the Display and Graphics business, Steve. And I think we're still going to be carrying forward headwinds on H1N1 so they'll be the tougher comps. All of the businesses were growing very, very rapidly last year and so it's not going to be easy but the forecast from our businesses and our own triangulation suggests you looking at something like, I think an 8% or so growth rate. That's what the number looks like, Steve, that's what the arithmetic shows and so far the arithmetic has carried us forward. I think in the Health Care business, I think it's going to get a little bit easier. It's my guess, I think we've got some stuff, which looks like it's better in that area. So I think that probably will get a little bit better. I don't expect the Industrial businesses to do all that much different. I think we might see just mild betterment in SS&PS as H1 was -- the back end of the fourth quarter was easing a little bit. So I think it's a mixed bag, Steve but all in all, we're comfortable with the projections that we've made.

Patrick Campbell

And Steve, and remember that if you back into the number that's 8% to 9% range, which of course, if you look at on a year-over-year basis and you look at one of our performance was last year which you're doing, which we had I think of 4% growth last year in the fourth quarter, it is really an improvement in performance. But when you look at kind of where our long-term growth rate wants to be, needs to be, that's consistent with our plan. Electro and Communications continues to run very, very strongly and they'll have a continued very strong fourth quarter here. There's no reason in -- Industrial continued at a double-digit growth here in the fourth quarter. And surprisingly, even Optical being down, it'll still be up on a year-over-year basis. It just won't be as good as it has been in the previous couple of quarters. So all in all, it's a very solid performance across the board.

C. Stephen Tusa - JP Morgan Chase & Co

And then just one follow-up quickly on 2011...

Matt Ginter

I'm giving you guys the 2011 outlook now.

C. Stephen Tusa - JP Morgan Chase & Co

There's a reason for everything, I guess. The share count number got bumped up, I think year to date, you're looking at something in kind of the 724, 725 range. What's the fourth quarter ending share count in that number?

George Buckley

So Steve, you must be talking about your model, the exit rate is about 731.

C. Stephen Tusa - JP Morgan Chase & Co

So that's a headwind next year as well?

George Buckley

Yes, and what you'll see kind of where through -- we'll give you an assumption as what our share count will be next year when we meet. We just haven't solidified that answer yet.

Operator

Our next question comes from the line of Terry Darling of Goldman Sachs.

Terry Darling - Goldman Sachs Group Inc.

I wouldn't disappoint you here, Pat, with more 2011. We do appreciate all that. If we look at the balance sheet, net debt to capital, now negative can you, George, talk a little bit how you're thinking about the pace of acquisitions because you've got plenty of firepower here, but presumably valuations are moving up and then maybe, dovetailing off the share count perspective, you clearly would have room to do some buyback as well and where is that in your thinking at this point?

George Buckley

I think, you can certainly start with your assumption, Terry, that we're going to have an anti-dilution strategy. And we've been trying to figure out finally what our position is going to be on more share buybacks. But I think you are right. We probably will continue at a similar pace on acquisitions next year. There's no reason to believe that it will be significantly off where we are today. Of course, you can't define that exactly at this stage of the game. But I think there is one school of thought here that says we might have done some of our share buybacks next year a little bit above what we've done in the last couple of years. So it's very much in the thinking, Terry, balanced approach. We'll have a higher CapEx number next year, perhaps 30%, maybe even 40% higher than we've had this year. So you open that sort of $1 billion, $3 billion, $4 billion. We've got a lot of demand in Asia, a lot of demand in some of these new market spaces in Abrasives and Renewables Energy area. So we're going to have sort of a balanced need, I think, but I do agree with you, probably it will be some room for a little bit more share buyback next year than perhaps we've crucially done in the last few years.

Terry Darling - Goldman Sachs Group Inc.

Maybe I'll try to get away with the clarification with this one, but on the 11% revenue growth in '11, couple of points in acquisition, a point on FX, organic implied around 8%, is that fair?

Patrick Campbell

I will give you more, okay. But you're releasing the rates stage here...

Terry Darling - Goldman Sachs Group Inc.

35% incrementals next year flow through. We do obviously across the industrial spectrum see rising raw material prices. Presumably that means you've got to accelerate some of your own price increase activity there. Just talk about your confidence on managing a tougher raw material environment in 2011 around sustaining that 35% flowthrough at this segment profit level.

George Buckley

Well, first of all, Terry, it's something we have to do. And of course, our first focus will be on driving productivity or gaining class reduction programs. But to the degree that we do need to take out pricing, we will do that. Follow to earlier comment, on raw materials, I think, the steep head was -- it is a little more pocketed. So certain industries will probably have to take some price here. Realistically, you probably lag a little bit to data to surprise increases that we probably maybe should've done a little bit sooner. So we are currently contemplating some additional pricing.

George Buckley

Some of this is actually happening right now, Terry, so we're on it and I think you're right. I think we're also seeing some easing in some key commodities, not huge easing and not making that prediction, but so a little bit of easing, bolstered by some price that captured close.

Operator

Our next question comes from the line of Deane Dray of Citigroup.

Deane Dray - Citigroup Inc

So it sounds as though the 2011 framework puts you at or above that longer-term 7% to 8% organic revenue growth goal. So I was hoping, George, can you comment on some of these recent moves that move you along that target? And just with regard to Alpha Beta, how that is this the pyramid, new product introductions of now the Index and now 34% of revenues from emerging markets. All of this moves you towards this goal, should we expect more of the same or is there further initiative?

George Buckley

No, I think, we like the pathway we're going down, Deanae, and you correctly interpreted pretty much all of what we're doing, driving the top line innovation that's why mentioned that 32% MPBI number. That's important. That will keep on filling the sort of the top of the hopper. Our improvement strategy, of which Alpha Beta is part of, helps us bulwark some of the leakage that might come. So that's an important part of the puzzle. You're right about our emphasis on emerging markets, completely correct and also, you'll see some of the acquisitions Deane, Attenti, Cogent in much higher growth spaces than traditionally have been the case with 3M. So we're playing all the sort of the strings on the fiddle and so far, the music is coming out okay. I'm sure here and there, things won't turn out exactly as we hope, but I think the last piece of the puzzle, Deane, not the necessarily and on any kind of negative note is we've got to start trying to put more of the magic on I think on our U.S. business, on our Western European businesses, but with the kind of capabilities that we have, I mean, when you think comparing us, left, right versus many of our competitors, you wonder how ultimately we are not going to win that battle. So I think it's now just a question of emphasizing those a little bit more and that might give us yet some more lift in due course. So I think you've already -- you've outlined the plan and the data right on. I don't think it's going to change a great deal, Deane.

Deane Dray - Citigroup Inc

And just a follow-up, the comment on Cogent, I mean you're already in a passport security system. What else does Cogent add in terms of a security platform?

George Buckley

Well, they're primarily border crossing, border-security type applications so they're all high-security military, embassies, those sort of things where you need high-security entry. So they're in the classic fingerprint areas and remembering that the only thing that a criminal leaves at a crime site is a fingerprint, it's still very important to local law enforcements, so that's still important. But you get up in the level of sophistication, iris scanning, palm scanning, those sort of things are kind of part and parcel of the secular move toward much more secured border crossing environment, with smarter passports, smarter, should we say biometric interrogation of people passing the border, so I think this is just a steady move up the technology space for us and into higher growth spaces, Deane.

Operator

Our next question comes from the line of David Begleiter of Deutsche Bank.

David Begleiter - Deutsche Bank AG

George, this is now your fourth quarter in a row of above market growth. Do you think you're gaining credit for that in the market? And if not, what will it take to get credit for this above market growth code that you've perhaps cracked here?

George Buckley

Well, I think, Dave, obviously we want the same thing that you do. I think understandably, investors want to see a track record. They're, I'm sure, very pleased with how it's gone so far, but I think ultimately, I've kind of viewed another couple of quarters, maybe we'll get to the tipping point of people's opinion, but it's still a lot of work to be done before them. We've got to continue to work at this. Host the stuff that we know, we know how to do the innovation, we know how to do the customer engagement and so maybe we're not getting quite the full credit for it yet, but I think it's no time to be impatient. At least not for us, we keep on doing what we do well and I have every confidence that it'll come our way in due course, David. But thank you for the implied help there.

David Begleiter - Deutsche Bank AG

And Pat, just in 2011, why the higher tax rate and will acquisitions be dilutive to 2011 EPS?

Patrick Campbell

First of all, acquisitions will be -- when you look at it on a year-over-year basis, the changing guidance that we've had in 2010 here, acquisitions will actually be a little bit accretive for us on getting a year-over-year basis, slightly. Tax rate at this point in time, our planning standpoint, our structural rate is more around 30% right now. So that's what we'll probably put in our plan for next year. Our long-term goal is 28.5% and keep driving that down. We are able to pull some things off this year that were more kind of one time in nature and obviously, the tax seems still has an assignment for next year to keep finding those things, but it's probably prudent at this point in time to probably plan around a 30% rate.

Operator

Our next question comes from the line of John Roberts from Buckingham Research.

John Roberts - Buckingham Research Associations

Do you think the correction in the display marketplace will flush through in the quarter or do you think it could be something that can linger into early 2011?

George Buckley

Well, you never really know. Depends on how sellthrough goes in the Christmas season is the answer to that question. But I'll try to address it. I think the vast majority of any image correction must be true. This is an industry with about six weeks inventory in the channel and their ability to flush you through is very rapid. So you kind of see these things that short and sharp. They drop fast, they come back fast. If history has anything to teach us, I think that you'll see the first quarter, once the correction has gone through, you'll see the first quarter accompanied by some more rapid growth or return to rapid growth. But also traditionally, it's usually associated with this is some extra pricing pressure, as the OEMs try to use that as means of just short of bulldozing their way through. They just basically -- they don't like volumes dropping and one of the games they play, one of the tools they use to push through. So I think that's the sort of environment that you'll see. And so I think that will ease as the first quarter goes through, maybe the second quarter. So that's kind of the pattern, short, sharp, fully fixed in the fourth quarter depending on sell through probably surface and some pricing pressure in the first half of the year and higher volumes. That's probably the way this thing is going to pan out.

Operator

Our next question comes from the line of Laurence Alexander from Jefferies & Company.

Lucy Watson - Jefferies & Co.

Good morning, this is Lucy Watson on for Lawrence today. Just wanted to ask, it sounds like about 40 to 50 basis points is the gross margin contraction this quarter was due to unfavorable mix. And I'm wondering if we should be taking in something around that range of unfavorable mix going forward? [indiscernible].

George Buckley

Yes, Lucy, it depends on what period of time you're thinking off is a piece of that is raw materials. We think we're going through kind of the peak of that right now. That actually should kind of structure declined and we think a little bit. Another piece of this of course is the mix of the business that we have between Health Care and Safety kind of being down. The H1N1 piece will obviously will last us for another quarter. So that impact will still be there. But we do expect Health Care will perform better in the fourth quarter than they did in the third quarter. So maybe, on a little bit -- but I don't think the same degree of reduction, Lucy.

Operator

Our next question comes from the line of Ajay Kejriwal from FBR Capital Markets.

Ajay Kejriwal - FBR Capital Markets & Co.

Just wanted to follow up on your comment on D&G and pricing in the first half next year. So some pressure there, but then would be interested in your thoughts on volume and the trends you're seeing with LED penetration and then expectations for large LCD TVs growth rates going into next year?

George Buckley

Well, I think you'll probably see some mix shifts as when there's any sense of market pressure, these manufacturers try fishing in different ponds to see where they can catch a big crunch of customers. So that's where I think the pricing mix will sort of pan out. We'll see and probably experiments in lower brightness, experiments maybe without films, experiments with fewer LEDs and a few things like that. But I think ultimately, I mean in the past, those things are not worthwhile to be completely honest with you and the customer's being unwilling really on a consistent basis, accept those. So I suspect that once the flushing has gone through the channel, it will return to more normalized basis. But I think it's -- there's been a fairly sizable gap between the standard CCFL TVs and the LED TVs. I suspect that gap, that will compress. And so they'll use that obviously to drive I think volume at the top of the performance pyramid. So a lot of kind of I suspect, turbulence even in the fourth quarter but certainly going over into the first quarter until they find a new mix of sales, brightness, sizes that seems to suit current market conditions. So some turbulence, probably putting pressures on price but volume coming back would be my prediction.

Patrick Campbell

Yes. We still expect flat panel TVs will still be a strong double digit. LED I think was you're kind of -- you've got a specific question on LED, the industry probably will run 20%, 25% this year. That number should be about to 2x probably in 2011 if we're probably approaching 50%. So obviously, that's a favorable mix shift for us.

Ajay Kejriwal - FBR Capital Markets & Co.

And just on that 30% increase in adding merchandising spend, clearly investing to push growth here. Maybe insight into how these expenses crack over the next few quarters and then the expectation on the payback?

Patrick Campbell

Let's say it kind of continues investments so it's not necessarily lumpy once we have as a good and the base will keep going. It's a little bit -- it adds up somewhat seasonal related, especially in the Consumer business. But our tracking is -- we have a very good tracking mechanism as to what we invest versus are we getting the sales back and it's driven by business but it's a long-term -- it's investment for us, both in the developed part of the world if you at all are a TV watcher, you've seen far more TV ads as well as online ads here in the U.S. But importantly, we're also investing a fair amount in the emerging markets. Now is the time to be investing in our brands in emerging markets and in some cases, that will not pay back immediately. Some of this is a longer-term payback and some of those emerging markets.

Operator

And our next question is a follow-up question from the line of Stephen Tusa from JP Morgan.

C. Stephen Tusa - JP Morgan Chase & Co

Just on the first half for next year, you talked about Display and Graphics getting better, I think the fourth quarter. Is there anything going on with the comps that are going to make kind of growth uneven as you look out to next year for the D&G or any other businesses?

George Buckley

Stephen, we haven't completely quarterized next year, okay? But nothing that comes necessarily to my mind. You look at -- there still was a little bit of H1N1 rollover into the first half of this year. So Safety has a little bit probably a tougher comp early in the year versus late in the year. Other than that, I don't see, I think, that is kind of materially different on a quarter-by-quarter basis.

Patrick Campbell

Steve, I think H1N1 was in the neighborhood of $40 million to $50 million in the first quarter of 2010.

Operator

That concludes the question-and-answer portion of our conference call. I will now turn the call back over to 3M for closing comments.

George Buckley

Thanks, everybody, for attending and we look forward to seeing you on December 7.

Patrick Campbell

Thanks, everybody.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.